What Is a Direct Skip in Generation-Skipping Tax?

A direct skip is a transfer subject to the Generation-Skipping Transfer (GST) tax, a federal tax that applies in addition to any gift or estate tax. The GST tax prevents wealth from passing to younger generations without incurring transfer taxes. A direct skip occurs when assets are transferred to a “skip person,” like a grandchild or someone significantly younger than the transferor. This transfer can be a lifetime gift or a bequest at death.

The GST tax framework was established to address strategies where families would bypass their children’s generation to avoid an additional layer of estate taxation. By transferring assets directly to grandchildren, wealth could move down two generations while only being taxed once. The direct skip rules ensure that a tax is imposed at each generational level.

Defining a Skip Person

A “skip person” is defined by their relationship to the transferor or their age difference. A lineal descendant two or more generations younger than the transferor, such as a grandchild or great-grandchild, is a skip person. A gift from a grandparent directly to a grandchild is a direct skip.

The definition also extends to individuals who are not related to the transferor. A non-relative is considered a skip person if they are at least 37.5 years younger than the person making the transfer. For instance, if a 70-year-old individual gifts assets to a 30-year-old friend, the friend is a skip person due to the 40-year age gap. This rule prevents using transfers to unrelated younger individuals to circumvent the tax.

A “non-skip person” is anyone who does not meet these criteria, such as the transferor’s children. An exception, the “predeceased ancestor rule,” applies if a child dies before the transferor. In that case, the deceased child’s children—the transferor’s grandchildren—move up a generation and are no longer considered skip persons.

A transfer to a trust can also be a direct skip if all its beneficiaries are skip persons. For example, if a trust is established exclusively for the benefit of the grantor’s grandchildren, the initial funding of that trust is a direct skip. The rules are designed to look through the trust structure to determine the generational level of the beneficiaries.

Calculating the GST Tax on a Direct Skip

The responsibility for paying the GST tax on a direct skip falls on the transferor, which is the donor for a lifetime gift or the estate for a transfer at death. The tax is calculated using a flat rate equal to the highest federal estate tax rate, currently 40%. This single rate simplifies the calculation for transfers not covered by an exemption.

Lifetime direct skips are calculated on a “tax-exclusive” basis, meaning the GST tax is calculated only on the value of the property the recipient receives. The funds used by the donor to pay the tax are not included in the taxable amount, making these transfers more tax-efficient. For example, on a lifetime gift of $1 million to a grandchild subject to a 40% tax rate, the GST tax would be $400,000. The donor pays this tax separately, so the tax is based only on the $1 million the grandchild receives.

Direct skips that occur at death are calculated on a “tax-inclusive” basis. In this case, the funds used to pay the GST tax are part of the taxable transfer. This results in a higher effective tax because the tax is calculated on a larger base amount that includes the tax itself. This difference encourages making generation-skipping transfers during life rather than at death.

Applying Exclusions and the GST Exemption

Several provisions can reduce or eliminate the GST tax on direct skips, including annual exclusions and a lifetime exemption. Proper planning involves strategically using these tools to shield assets from the tax.

The annual gift tax exclusion allows an individual to give up to $19,000 per person in 2025 without incurring gift tax, and this exclusion also applies to the GST tax. A married couple can combine their exclusions to give $38,000 per recipient. To qualify for the GST annual exclusion, a gift made to a trust must meet specific requirements, ensuring it is for the exclusive benefit of a single skip person.

An exclusion also applies to direct payments for educational or medical expenses. If a grandparent pays a grandchild’s college tuition directly to the school or a medical bill directly to the provider, these payments are not subject to the GST tax. This exclusion is unlimited and does not count against the annual exclusion or the lifetime exemption.

Every individual has a lifetime GST exemption of $13.99 million per person for 2025. This amount can be allocated to cover any generation-skipping transfers made during life or at death that are not otherwise excluded. The GST exemption is not “portable,” meaning a surviving spouse cannot use any unused portion of their deceased spouse’s exemption.

How to Report a Direct Skip

The reporting process for a direct skip depends on whether the transfer is a lifetime gift or occurs at death. Specific IRS forms are used to track these transfers, allocate the GST exemption, and calculate any tax due.

For direct skips made during life, the transfer is reported on Form 709, the U.S. Gift (and Generation-Skipping Transfer) Tax Return. The form is used to list direct skips, calculate the tax, and allocate the GST exemption. This form must be filed for any year in which a taxable direct skip is made, even if no tax is due because the GST exemption is applied.

A direct skip at death, such as a bequest to a grandchild, is reported on Form 706, the U.S. Estate (and Generation-Skipping Transfer) Tax Return. The estate’s executor is responsible for reporting these transfers, allocating the decedent’s remaining GST exemption, and paying any tax from estate assets. If a direct skip is made from a trust at the time of death, it is reported on Schedule R-1 of Form 706.